The Idea of Normal Rate of Profit
The idea prevails that there is a 'normal' rate of profit, a rate around which at any one time the rates of various industries tend to cluster. If the rate of return in any field is much higher than the average, it is said, more enterprisers will enter the field, and the rate will fall, and vice versa; so that in the long run rates always tend toward an equality. Whether or not there is a statistical basis for this traditional theory concerning long-run rates, the theory has little bearing upon the practical problems of any given year, or any two or three years. In the past, economists have been concerned mainly with long-run rates; here we are considering short-run rates.
Many current proposals for taxing business, regulating railroad tariffs, controlling prices, fixing interest rates, and turning private business over to the Government are based on the assumption that there is a certain rate of profit that business men ordinarily receive. If any of them fail to realize the 'normal' return, they are supposed to be reckless risk-takers. If any succeed in obtaining far larger returns, they are condemned as 'profiteers.' Evidently many who use that vague epithet are convinced that business men do not gain much more than the 'normal' rate of profit except through reprehensible means.
As a matter of fact, among successful enterprises there are extremely wide variations in profits. War and the weather, fashions and finance, politics and business cycles do not affect in the same degree the profits of any two industrial groups or of any two individual concerns. Not only does the sum total of business profits fluctuate widely from time to time, but also the profits of the various industries and of different concerns in the same industry. In any given year some industries suffer while others prosper; some concerns in a given industry succeed while others fail; and certain branches of a given industry fare much better than others. Each of these evidences of the precarious nature of business enterprise is of such practical importance that we shall do well to consider it in some detail.
There is No Normal Rate of Profit
From these facts, it is evident that, for any one year or for any series of five or even ten years, there is no normal rate of profit. The profits of each industry vary widely from quarter to quarter and from year to year. This is also true, with few exceptions, of individual concerns, and of various branches of the same industry, and of business as a whole. In any given year some concerns prosper while others in the same industry suffer losses; some industries flourish while others fail; some parts of the country show exceptionally large profits while other parts show exceptionally large deficits. Nor is there, in the course of a major business cycle, any rate of change in profits and losses that we may properly call normal. In spite of the interdependence of all classes of enterprise and all geographical units, alternating periods of activity and depression do not have the same effect on profits in any two industries, or in any two countries, or in any two sections of the same country. All this is equally true, whether we consider dollar income, or income corrected for changes in the purchasing power of the dollar.
Profits, in short, are highly fortuitous. They rise and fall quickly and far in response to innumerable adventitious and unpredictable influences that never affect, in precisely the same degree, the supply of or the demand for any two commodities or any two services. Unlike population and production, profits do not show a normal rate of growth. Unlike rates of interest, rates of profit do not reveal a central tendency around which the variates cluster closely. In so far as the attitude of Congress and of the public toward business enterprises is dependent on a belief that there is a rate which the profits of individual enterprises tend to approximate, in a given year, or a rate of profit which tends to prevail, year after year, in business as a whole, that attitude is determined by an assumption which is contrary to fact. There is no such thing as 'normal' short-run profits, in any useful sense of the word.
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